Chinese banks are seeing a rising pile of bad loans, the latest scare from the world's No. 2 economy, which is reeling from a shrinking manufacturing sector, collapsing exports and sliding corporate profits.

Smaller commercial banks are starting to report spikes of as much as 82 per cent in their overdue loans in the first six months of this year, as cash-strapped companies delay repayments.

Last week, seven out of the 16 listed big banks said their non-performing loans' ratios had risen in the same period.

"Experience has taught us that a bad loan crisis usually comes three years after a period of abnormal credit surge," Wei Guoxiong, head of chief risk management at ICBC, one of China's big four banks, said yesterday. He was referring to increased lending in response to the global financial crisis in 2009. "There will be a notable rise in bad loans in the banking sector this year."

The bad loans signal the trouble that lurks beneath what appeared to be otherwise benign first-half results of Chinese lenders, which the central government is relying on to extend credit needed to kick-start new stimulus projects and private investment.

But Beijing looks increasingly constrained in how it can ease policy to fight the worst slowdown in three years.

It cannot aggressively boost growth as it needs to avoid the asset bubbles and over-capacity problems spawned by the lending spree during the 2009 crisis.

The effects of that credit binge are now overshadowing the state-owned giants as they grapple with political pressure to lend more, even at higher risk.

State media like Xinhua have sought to calm concerns by reporting that the ratio of non-performing loans to total loans for banking sector in the first half of this year is largely below 1 per cent, low by international standards.

But the deepening slowdown in the manufacturing sector may mean that more overdue loans and defaults will surface in the next few months.

The quality of banks' loan assets is worsening amid slowing domestic and overseas demand that have affected the manufacturing sector, small and medium-sized enterprises (SMEs) and exporters in coastal areas. And "we also see persistent credit tightening in the real estate sector and a slowdown of land-sale revenue for local governments as factors that will further erode banks' asset quality".

Indeed, local governments are seen as a risk area. While they are expected to finance the bulk of new investment projects to boost growth, they are struggling with debt from the previous round of stimulus.

Local governments' financing vehicles owe China's big four state banks outstanding debts of 2.6 trillion yuan (US$410 billion) at the end of June, the official Economic Information Daily said yesterday. This is a jump of 500 billion yuan from last year end.

Meanwhile, banks with exposure to SMEs in entrepreneurial hubs like Wenzhou, a city in eastern China, face growing risks.

More than 10 per cent of members of the Wenzhou SME association have gone belly-up, while another 20 per cent are struggling, according to association chairman Zhou Dewen.

And Wenzhou was where 90 per cent of the state-owned Bank of Communications' 887 million yuan of new default loans in the first half of this year came from.

Smaller banks like Shanghai Pudong Development Bank and China Everbright Bank saw their overdue loans surge by between 62 per cent and 82 per cent.

Meanwhile, creditworthy companies that the banks do want to lend to are shying away from borrowing, said University of International Business and Economics professor Li Shimin.

"While the central government has put pressure on state-owned banks to expand their financing for enterprises, the uncertain economic environment now has weakened businesses' appetite for loans," he said.